In this article, IMPOWER business development executive Matthew Cruise writes that the South African commercial and industrial (C&I) property sector is facing a major regulatory inflection point as the country prepares to enter Phase 2 of its carbon tax regime.

As South Africa prepares to enter Phase 2 of its carbon tax regime in 2026, the commercial and industrial (C&I) property sector is facing a major regulatory inflection point. With tax-free allowances set to shrink and effective carbon prices rising steeply over the next five years, property developers and large asset owners are under pressure to rethink their energy and emissions strategies, or face escalating cost burdens.

Under the revised framework, the carbon tax will increase from R308/t of CO₂-equivalent (tCO₂e) in 2026 to R462/tCO₂e by 2030. At the same time, the basic tax-free allowance, currently at 60%, will be reduced to 50% in 2026, and will continue to decline by 2.5% a year to reach 30% by the end of the decade.

The real shift in Phase 2 is that carbon liabilities will start becoming material for the commercial property sector, particularly for buildings with high energy demands and no mitigation strategies in place. We’re no longer talking about long-term climate compliance. We’re talking about short-term cost control.

ENERGY PERFORMANCE TO BECOME A KEY VALUE DRIVER
In a market already grappling with rising electricity tariffs, increasing municipal surcharges and infrastructure constraints, the financial implications of carbon pricing could be substantial, particularly for energy-intensive facilities such as logistics parks, data centres and manufacturing industrial parks. I believe this will redefine what makes a building commercially attractive.

Buyers, tenants and investors will increasingly evaluate buildings based on their energy performance and embedded emissions. Those that don’t meet emerging efficiency benchmarks will see higher operational costs and may struggle to attract premium occupiers.

The upcoming changes make it critical for developers and landlords to align carbon mitigation with energy planning. Reducing emissions through solar integration, energy-efficient design and smart systems isn’t just about compliance anymore, it’s about maintaining competitiveness.

INDUSTRY RESPONSE REMAINS SLOW
Despite clear timelines, many property stakeholders remain in the early stages of carbon tax planning. There’s a general lack of preparedness, particularly among mid-sized developers and portfolio owners who haven’t historically factored emissions into their investment models.

The time to act is now. Conducting a building-level emissions audit, setting reduction targets, and identifying offset opportunities are the first steps. But property owners should also look at renewable energy, such as investing in solar, or solar Power Purchase Agreements, which saves you money from the first month of operation, without any upfront costs.

CARBON OFFSETS AND COMPLIANCE MECHANISMS
Phase 2 of the carbon tax regime will also increase the allowances for carbon offsets – rising to 25% for combustion-related emissions and 10% for process and fugitive emissions. These changes are intended to stimulate the domestic carbon offset market, providing C&I property players with additional flexibility to manage their tax exposure.

However, offsets are not a silver bullet. Offsets should complement, not replace, direct emissions reductions. Property owners need to demonstrate clear intent to improve energy performance on-site before relying on credits.

The Department of Forestry, Fisheries and the Environment is also set to roll out mandatory carbon budgets in tandem with the tax revisions, adding further reporting and compliance layers for high-emitting businesses.

A CATALYST FOR CHANGE, IF SUPPORT FOLLOWS
While the policy intent behind Phase 2 is to accelerate decarbonisation, there is concern that the regulatory complexity may outpace the capacity of the market to adapt, particularly in the absence of adequate incentives, funding mechanisms or technical support.

I am cautiously optimistic. If accompanied by the right infrastructure investments and regulatory clarity, the new tax regime could become a major catalyst for green property development. But we need better coordination between government, private sector and financiers to ensure that property players, especially those in the C&I space, have the tools and resources to respond effectively.

THE CASE FOR PROACTIVE ADAPTATION
Looking ahead, South Africa’s carbon tax trajectory offers a valuable opportunity for the property sector to lead on sustainability, rather than play catch-up. Those who adapt early will gain financial, operational, and reputational advantages. And they’ll be better positioned to meet future carbon regulations.

For a sector facing rising pressure from tenants, regulators and investors alike, the message is clear: carbon is no longer just an environmental issue, it’s a bottom-line issue.

*Cruise is an energy expert and business development executive at IMPOWER, a leading commercial and industrial solar provider. He started his energy sector experience working in Eskom for 11 years and has been working in the private solar sector for the last four years.